Sep
25
The End of Lehman Brothers
Filed Under Mortgage
In startling news, people wake to a Monday where two of the behemoths of Wall Street and the financial world have gone down hard. The fate of Merrill Lynch and Lehman Brothers is scary and harbors the question of whether the mortgage market is dead?
The failure of Lehmans is scary. Formed in 1850, this was one of the biggest investment banks in the world. It made money in a wide variety of markets, but went bankrupt with an eye popping $613 billion in bad debt.
The essential failure of Merrill Lynch is even more troubling. Saddled with bad debt, it was thought to have a solid plan for surviving. Obviously, that was not the case. With help form the Feds, Bank of America purchased Merrill for a song at $29 a share.
Make no mistake, the failures of these two stalwarts is an amazingly bad sign. These are not some small regional banks going down the drain. This is the equivalent of Google failing and selling out to Microsoft as a last gasp gesture.
The current financial market is an interesting one. We have never seen such a massive meltdown and yet so little a reaction to it. We are seeing events in the banking industry that have not occurred since the Great Depression and nobody seems to care.
Chairman Ben Bernanke of the Federal Reserve is the master pulling the strings. Watch his actions closely. The Fed has been doing shocking things, but it always occurs around a weekend when media attention is low, so most of us do not grasp the significance.
While Bernanke has deftly kept people from panicking and rushing their banks, he can only do so much. The simple fact is mortgage securities are under massive pressures. Credit crunch does not begin to describe the problem.
The circumstances surrounding the real estate market are so bad that many larger investors will not put money into mortgages for fear of being sued by their investors. This is because mortgage securities are viewed as being so risky.
That may sound somewhat interesting, but think it through. The backbone of the American Dream of homeownership is now viewed as a bad investment. Homeownership is the key to our middle class, so now what?
So, are we headed for financial catastrophe? Could the banking industry collapse and lead us to another Great Depression? It sounds ludicrous, but the fates of Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch make it a valid question.
Liquidity is the key. Keeping banks up and running is the immediate task and the Fed has been doing just that. The latest news that the Fed has managed to get banks to kick in $70 billion for banks in bad shape is just another step to save the industry.
Unlike the last Great Depression, the financial markets are intertwined. A depression in the US will be a depression worldwide. Nobody wants that to happen, so look for aggressive action to prevent it.
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